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Is it the futuristic upturn in the auto industry or merely a ploy to eliminate competitors that is guiding the merger negotiation between GM and Chrysler? Gyanendera Kashyap of 4Ps B&M analyses the ifs and buts of the deal...
Centenary celebrations for General Motors, indeed glorious for the long-heritage American carmaker; but what did it receive as its 100th birthday gift? An accumulated jaw-dropping $58.41 billion in net losses for the bygone quarters! And then there was the uninvited Wall Street devil, doing all in its might to break the backbone of all Detroit four-wheeled giants. So what’s it like for GM today? The firm, arguably is currently in the leanest phase in its history, so much so that some critics believe that filing for bankruptcy would be the best hope pill to cure the fatal disease of extinction.
Over the last five years, it has invariably been in the red and on a cumulative basis has suffered losses to the tune of a pathetic $44.57 billion. The reasons: sales and profits have declined in the past many quarters for all three; manufacturing units are being closed down, again by all three; and most importantly, while the entire American auto industry is reeling under pressure, two of them (GM & Chrysler) are discussing a possible merger (Christ!!!). David Wyss, Chief Economist, Standard & Poor, attempts an explanation of the turbulent environment as he points out, “Sales of new vehicles are hurt by the recessionary economic environment and the increasing difficulty of financing for US buyers.” Very true for US, but the current situation as a result of the ongoing dislocation in the credit markets and deteriorating economies in Asia and Europe are no different for global automakers alike. Amid this turbulence, consolidation cannot be ruled out. And this is exactly what GM and Chrysler are talking about. Negotiations in the power corridors of Detroit are reflective of the competition from Japanese automakers and the need for restructuring. But what is worth pondering over is the fact that a year earlier, GM (which had lost out the bid to merge Chrysler with itself to Cerberus Capital Management) had concluded Chrysler wasn’t a good fit. A year later, and suddenly so, it thinks that it has found a saviour and is discussing a possible merger?!
Usually mergers account for more job losses rather than additions, and this is what is the worrying fact. At a time when behemoths are filing for bankruptcies and seeking for Fed assistance, downsizing in the name of corporate restructuring would amount to an absolute catastrophe. Skepticism prevails over the merger or a tie-up between GM and privately-held Chrysler, as it would not do much to address either company’s financial issues in terms of reducing structural costs. As a matter of fact, over the bygone four quarters, GM has posted terrifying losses and its sales of $38.1 billion during Q2, 2008 represent a fall of 18.2% as compared to the same period a year back. On the other hand, Chrysler lost $510 million during the first quarter of 2008 and its sales declined by over 25% as compared to the previous quarter. (This also raises questions over the logic behind the valuation of Chrysler at $7.4 billion which was bought by the PE firm Cerberus Capital Management last year.) Moreover, given the fact that GM is trying to free up $15 billion by 2009 and Chrysler’s admittance that it won’t be in a position to post profit in 2008, the merger is clearly not a ‘natural and healthy’ fit for the two ailing bigwigs! Instead a partnership or expanding existing ties would be more financially viable.
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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